LEGISLATION & REGULATION

The noted and newsworthy attorney general of New York is taking
aim at some of the biggest middlemen in the insurance business.

Going for Brokers: Spitzer Rides Again

By John CarrollManaged CareJuly 2004

Tim Elenz has few illusions about the competitive world of health insurance
brokers. The head of Elenz & Associates is a self-described street-taught
kid who grew up in Chicago, and through the years he's heard plenty about agents
who take advantage of the freebies on offer from health insurers for bringing
them clients.

"I've seen just flagrant disregard of the law," he says. At times it's just
an instinct — a gut reaction to seeing a notoriously low broker's commission
listed on the public files. Sometimes it's personal, turning down offers of
trips and other off-the-book freebies that come his way.

And it all revolves around the lead role that brokers play matching mostly
small and medium-sized businesses with the health plans that need them as
clients. Even after a short conversation with Elenz, you'd come away thinking
it's a badly kept trade secret that plenty of employers are often the last to
find out exactly what their broker is getting by way of compensation.

Says Elenz: "It's the only business I know where there are no checks and
balances."

But that might be about to change.

New York Attorney General Eliott Spitzer, the take-no-prisoners law
enforcement czar whose corruption crusades brought Wall Street titans to their
knees, has discovered insurance brokerages. And their world may never be the
same.

Three giant insurers — Aetna, Cigna, and MetLife — all confirmed last June
that Spitzer's office has been issuing subpoenas as part of an ongoing probe
into the financial ties they have with brokers who handle health, disability,
and group life accounts. That move came after Spitzer had handed out subpoenas
to some of the biggest names in commercial brokerage: Marsh & McLennan, Aon,
and Willis Group Holdings, among others. Hartford Financial Services Group was
reportedly told to be careful to preserve any documents it may have on hand
regarding brokers.

The focus of the investigation is on contingency payments — also known as
placement service agreements, or PSAs — which insurers often pay brokers after
calculating the profitability of the policies they deliver. These contingency
payments are in addition to the straight percentage commissions brokers earn on
completing a deal.

Last January, J.P. Morgan estimated that contingency payments accounted for 5
percent of annual brokerage revenue and 20 percent of the earnings generated by
publicly traded brokerages: $306 million at Marsh, $208 million at Aon, and $36
million at Willis.

No charges filed

It's important to spell out here in stark terms that no one has been charged
by Spitzer or anyone else of any kind of wrongdoing. Spitzer's spokesman has
only confirmed that the office is in the early stages of a probe. The brokerage
companies are generally staying tight-lipped about the investigation. Marsh,
Aon, and Willis all said that they informed clients of any payments brokers may
have received — either through direct disclosure, their Web site, or other
working documents. "Brokers have had such agreements with insurance companies
for many years to compensate the brokers for services they provide to the
carriers and many of the carriers have these agreements with brokers," Willis
responded in a brief statement last April. And after acknowledging the recent
spate of subpoenas, Cigna announced it would cooperate with investigators.

Spitzer's recent round of subpoenas, though, indicates he has plenty more
digging to do.

And there's the rub. As news of the probe has spread, it's begun to shift the
spotlight onto a side stage of the insurance business. If Spitzer keeps digging
for evidence of kickbacks and launches one of his trademark legal offensives,
his fearsome reputation may well kick off copycat AG investigations around the
country and spawn new regulations governing the ties. Connecticut Attorney
General Richard Blumenthal announced just weeks after Spitzer made his first
move in April that he's conducting his own probe into contingency payments to
brokers, looking to see just how much brokers had disclosed to their clients.

Close financial ties

It's long been well known in the insurance industry that insurers and brokers
have close financial ties. It's also widely recognized that insurers have to
work closely with brokers — or lose out on a significant share of business.

"Carriers have complained to me that they have to make these payments," Terry
Havens, the chief executive of Havensure, a small employee benefits consulting
firm in Cincinnati, told the New York Times, which broke the most recent story.
"They don't think they are appropriate. But if they don't pay, they don't get to
play in the game. They don't get the business."

Four years ago, McKinsey's then chief of worldwide payer and provider health
care practice, Bernard Ferrari, MD, had this to say to Managed Care: "I think
that today, the broker channel is extraordinarily important and therefore
extraordinarily powerful. The only effective way to grow a plan is through
brokers."

Public advocacy groups maintain that power has been a corrupting
influence.

The Washington Legal Foundation, which bills itself as an "advocate for
freedom and justice," saw a conflict and pressed both Spitzer and California AG
Bill Lockyer last February to take a good hard look at the broker-insurer
relationship. In a news release issued months ago, the group said that payments
"can compromise the broker's fiduciary duty to represent the best interest of
their clients."

Convoluted disclosures

In other words, brokers were more likely to steer clients to the insurers
that offered them the best deal than to the best coverage for the businesses
they represented. And as for those public disclosures the broker groups refer
to, the foundation noted that many were omitted altogether or were so convoluted
that clients couldn't understand them.

"This is a troubling trend in the insurance brokerage industry," WLF Chairman
and General Counsel Daniel J. Popeo told the Insurance Journal. "Insurance
brokers are paid to advocate for their customers, not themselves."

Right now, though, the foundation isn't saying anything publicly. A spokesman
said it would have no comment, and added that the news release was long ago
removed from its Web site.

The Council of Insurance Agents and Brokers says the contingent payments
reflect the overall amount of business a brokerage brings to an insurer and
isn't tied to any one policy. In addition, businesses benefit from the
relationship between broker and insurer, a relationship that can translate into
lower insurance rates.

The customers are entitled to whatever information they need about the
arrangements to make an informed purchasing decision, CIAB said in a written
statement. And the council adds that adequate disclosures are made.

For his part, Elenz is hopeful that Spitzer's move could signal a new day —
one in which the broker's compensation is fully disclosed in a way that can be
trusted. "I believe that what Eliott Spitzer is doing is a good thing and I hope
it does spread across the country."

It's long overdue, he adds, and it's clear to him the industry can't police
itself.

"It's like a copper on the take," he says. "At what point does he not take
the 20 dollars any more?"

John Carroll, a freelance writer living near Austin, Texas,
has been a contributing editor to Managed Care for three years.